Covenant Not to Compete

[JohnH]

My brain has seized up on this. Taxpayer is a member of an LLC taxed as a partnership which sold its assets in an all cash sale. The detailed sales agreement spells out the amounts paid for fixed assets, Inventory, Goodwill/Tradename. Then there's a separate payment the 3 member/partners of $20K each for a Covenant Not to Compete.

The K-1 shows the capital gain and Sec 1231 gain on the proper lines. It then lists the $20K on line 11 (F) as an informational item (although I don't think it ought to be there). In any event, I know the Covenant Not to Compete is ordinary income, but can't figure out where to report it on the 1040. Line 21 or somewhere else?

[TAXNJ]

See post 9-1-2006

See post 9-1-2006 title "Sale of Business

[TAXNJ]

More

Additional info

[Roland Slugg]

Yes, income from a covenant not to compete is taxable as ordinary income but is not subject to S-E tax. Report on the "Other Income" line on F-1040 ... line 21 on the 2014 form.

It's too bad the sellers allocated that much to the covenant. They could have achieved a better result for themselves by allocating more to goodwill or trade name and less to the NC covenant. That would have produced more capital gain and less ordinary income for them, and it wouldn't have made any difference to the seller.

[JohnH]

Roland: Thanks for the confirmation. I've searched high and low, but cannot find anything providing clear direction for where to report it. I had settled on Line 21 (with no S/E tax) as the default, but just wondered if I might be missing something.

Thanks for mentioning the tax planning aspects, but they did a pretty aggressive allocation - there's over $700K allocated to goodwill in the written agreement.